Key Takeaways
- Balancing your cash flow is about enjoyment now versus later.
- This is a subjective arena, but if you look at an objective case study, you can see that it is possible to either save now or later with the same end result.
- There are two caveats to either spending now or later; you have to consider how you would adjust to taking a cut on your spending habits, and you have to think about how your long-term health affects your plan.
Remember Aesop’s Fable The Ant and the Grasshopper? The grasshopper sang and frolicked all summer, while the ant worked away and saved food. Then the winter came, and the grasshopper was starving and asked the ant for food. Well, it’s a little like that when it comes to enjoyment up front or enjoyment later when you look at balancing your cash flow year to year and what you spend that on.
This is a subjective arena, but there are some objective results that we can look at. Look at the triangles below. Individual #1 is saving 15% up front, bills are the same as Individual #2, with little left for enjoyment. Individual #2 is the opposite with enjoyment up front, billing the same, and nothing left for savings.
How does this work out for them?
Let’s say that both of our individuals are 25 years old, earning $50,000 a year. With Individual #1’s saving strategy of 15%, they are putting away $7,500 a year. At 6% earnings over 15 years to age 40, Individual #1 has $174,000. Individual #2 has zero dollars saved at age 40.
They both decide to save 15% at age 40 and they’ve moved a bit up the ladder, so their salaries are now $100,000 each. They save $15,000 a year at 6% all the way until age 65, which is another 25 years. Individual #1, because of the earnings they accumulated, gets all the way to $1,574,000. Individual #2 at age 65, gets to $823,000.
Now, Individual #1 says, “Hey, I’m done saving, I’m just going to live off my earnings.” Their asset grows by 3% a year, with no additional investment in it. However, Individual #2 keeps putting $15,000 away a year. The question is: At 6%, when does Individual #2 break even with Individual #1? At age 82, 17 years later.
It’s really about enjoyment up front, or enjoyment later, but there are a few caveats to keep in mind. First, when you get used to a certain level of spending, you tend not to want to go backwards, so that can be a tough adjustment. The second caveat is that you never know how your health is going to be later in life. You do take a chance when you depend upon earnings later than earlier.
How do you balance these subjective areas and objective results when it comes to cash flow? Keeping these caveats and your own personal goals in mind will help you to grow your wealth successfully.
Until next time, enjoy!
Gary